Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc. Relating to Elimination of the Prohibition Against Market-Maker Surcharges on Single-List Issues

[Federal Register Volume 64, Number 159 (Wednesday, August 18, 1999)]
[Notices]
[Pages 44981-44982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21444]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41732; File No. SR-CBOE-99-30]
August 11, 1999.


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Elimination of the Prohibition Against Market-Maker Surcharges on 
Single-List Issues

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 23, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CBOE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 2.40, Market-Maker Surcharge 
for Brokerage, to eliminate the restriction against a surcharge from 
being assessed on trades in classes not traded on another options 
exchange. The text of the proposed rule change is available at the 
Office of the Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of a and statutory basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The Exchange has prepared summaries, set 
forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange recently received approval from the Commission to 
assess a surchange on market-makers trading in multiply-listed classes 
pursuant to new CBOE Rule 2.40.\3\ The Exchange believes CBOE Rule 2.40 
will enable the Exchange to compete for order flow more effectively 
against other options exchanges.
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    \3\ Securities Exchange Act Release No. 41121 (February 26, 
1999), 64 FR 1123 (March 9, 1999).
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    In this present filing, the Exchange proposes to eliminate a 
restriction in paragraph (e) of CBOE Rule 2.40 which prohibits a 
surcharge from being assessed on trades in classes not traded on 
another options exchange. When the Commission approved Exchange Rule 
2.40 recently, the Commission stated that it believes ``that the 
proposed rule change, as amended, is a reasonable effort by CBOE to 
better enable its competitive market-maker crowds to compete for 
multiply-listed options with other exchanges that employ a specialist 
system.'' \4\ While the Exchange agrees that the proposed rule provides 
the Exchange with the tools to compete more effectively in attracting 
order flow in multiple list issues, the Exchange believes CBOE Rule 
2.40 would be more effective and useful if the restriction against 
imposing a surcharge on single-list issues was eliminated.
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    \4\ Id., 64 FR at 11525.
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    The Exchange believes CBOE Rule 2.40 would be more effective by 
eliminating this restriction,\5\ because specialists on other 
exchanges, who may trade both single-list and multiple-list issues, 
have greater flexibility than CBOE market-makers currently having using 
CBOE Rule 2.40 to adjust their transaction fees. Specifically, these 
specialists are able to seek to attract customer loyalty and a larger 
portion of their order flow in the multiple-listed issues by reducing 
fees and charges not just for those multiple-listed classes, but also 
for the single-list classes. Consequently, the Exchange will find it 
more and more difficult to compete for order flow in multiple-listed 
issues--even with Exchange Rule 2.40 in place--as long as specialists 
are able to entice firms to send order flow to them by more broadly 
reducing their fees, to include their single-list issues. The 
elimination of the single-list prohibition will allow the Exchange to 
provide the surcharge to floor brokers (thereby inducing a reduction in 
their brokerage rates on customer orders) and/or to reduce the book 
brokerage rate in single-list issues which will expand the benefit of 
this program and the potential benefit to customers.
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    \5\ The Exchange added the prohibition against imposing the 
surcharge on single list issues at the suggestion of Commission 
staff.
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    In requesting the Exchange to revise its original proposal to limit 
the surcharge to multiple-listed issues only, the Exchange is aware 
that the commission believed that competition among exchanges in the 
multiple-listed classes would obviate the risk that the spreads in 
these classes would not be widened to compensate for the cost of 
market-makers of any surcharges. As the need for the proposed rule 
change makes clear, that same rationale extends to single-list classes, 
since the overall competition for order flow encompasses all issues, 
whether single- or multiple-list. Moreover, the Exchange believes that 
current safeguards in CBOE Rule 2.40 will protect against a widening of 
the spreads on the single-list issues which become subject to a 
surcharge. Specifically, the cap on the surcharge amount of $0.25/
contract should help to ensure that spreads are not widened in the 
single-list issues.\6\ Of course, the Exchange is also obligated to 
analyze data comparing spreads before and after the imposition of the 
surcharge so any

[[Page 44982]]

possible ill effects of the elimination of the prohibition will be 
readily noted. Finally, the Exchange believes the elimination of this 
prohibition against imposing the surcharge on single-list issues would 
be fair. Specialists on the other exchanges today are able to change 
their fees on their single-list issues without having to study or 
justify any possible effect this action may have on the spreads in 
those issues. The Exchange wants to provide its marketmakers with the 
same ability to apply the surcharge to single-list issues.\7\
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    \6\ As the Exchange noted in Amendment No. 1 to SR-CBOE-98-35 
(dated February 26, 1999), the minimum bid-ask spread for the option 
class is $6.25 (one sixteenth of a dollar ($0.0625) times a 
multiplier of 100 since one option contract represents 100 shares of 
stock) although the actual spread for many options in wider. (Given 
that the spread is usually at $6.25 or greater, the Exchange 
believes it is unlikely that spreads would be adjusted to account 
for a surcharge of $0.25 or less.
    \7\ Under CBOE Rules 2.40 the appropriate Floor Procedure 
Committing actually imposes the surcharge on a class of options but 
the market-makers in the training crowd may recommend a surcharge 
amount.
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2. Statutory Basis
    The CBOE believes that the proposed rule change is in furtherance 
of Section 6(b)(5) the Act \8\ in that it is designed to remove 
impediments to a free and open market and to protect investors and the 
public interest.
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    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action.

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days such date if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    Institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-99-30 and 
should be submitted by September 8, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21444 Filed 8-17-99; 8:45 am]
BILLING CODE 8010-01-M